Homework Homework Set 4 Score 0 of 2 pts P1132 similar to Sa

Homework: Homework Set 4 Score: 0 of 2 pts P11-32 (similar to Save 19 of 25 (18 complete) HW Score: 57.94%, 28.97 of 50 pts Question Help Real options and the strategic NPV Jenny Rene, the CFO of Asor Products, Inc., has just completed an evaluation of a proposed capital expenditure for equipment that would expand the firm\'s manufacturing capacity. Using the traditional NPV methodology, she found the project unacceptable because: NPVtraditional -S2292

Solution

NPV of project without any option : -2292

Option 1

NPV of abandonment = 1040

Probability = 0.3

Effective NPV of abandonment = 312

Option 2

NPV of Growth = 3640

Probability = 0.25

Effective NPV of growth = 910

Option 3

NPV of timing= 10700

Probability = 0.15

Effective NPV of abandonment = 1605

By looking at these options, it is clear that Option 2 and Option 3 can be combined.

It means that if the projected outcomes occured, firm can expand its product offerings and also they can delayed certain phases if market is competetive. Project should not be abandoned.

By combining option 2 and option 3:

Strategic NPV = NPV + NPV option 2 + NPV option 3

Strategic NPV = -2292 + 910 + 1605 = 223

In this problem, it is clear that real options helps managers and leaders to take strategic decision to maximize the firm value. If there were no options in our example, CFO would have scrapped the project. But due to these options, the project can be taken forward and can generate +ve value of the stakeholders.